Analyst: Qwest/CenturyLink merger could make sense

More analysts are talking about how Qwest could be a good acquisition target, something that’s been discussed for years, dating back to the end of the Joe Nacchio days in mid-2002.

At any rate, Chris Larsen, a Piper Jaffray Cos. analyst in New York, told Bloomberg News recently that Qwest’s stock price, hovering around $4 a share, could make the company a potential target.

The stock price, which gives Qwest a market value of about $6.8 billion, may make it an attractive target to other companies, Larsen said. The company formed by the combination of CenturyTel and Embarq, which has branded itself CenturyLink, is the most likely acquirer, and that would be a “merger of equals,” he said.

The same story quotes Qwest CFO Joe Euteneuer as saying its stock price prevents the company from being the acquirer, but that he thinks consolidation will continue.

“Our stock has not been trading at a high-enough level to really have it be a real currency to go out and do something ourselves,”
Euteneuer said in an interview yesterday in New York. “That would be our biggest stumbling block. It’s not from a lack of willingness or desire, but really a lack of currency.”

“Consolidation is something that, in my opinion, I think is going to happen,” Euteneuer said. “Enough people have talked about it, enough people want it to happen and can see the benefits of it.”

However, the company couldn’t dump its nationwide, fiber-optic network earlier this year, a sale that would’ve made an acquisition of its local phone and Internet business more likely.

Some industry observers have told me that it would make more sense for Qwest to sell off its local phone business in pieces. Verizon and AT&T would have interest in their lines in major metro areas such as Denver, Phoenix and Minneapolis, while CenturyLink and other smaller players would gobble up the rural lines.

But at the end of the day, Qwest would still have that fiber-optic network to deal with.

Below is the full text of the Bloomberg story.

[BYLINE1]By Amy Thomson
Bloomberg News Service
[TEXT1J]Qwest Communications International Inc., the local phone provider in 14 U.S. states, said its stock price may be standing in the way of an acquisition as mergers sweep the industry.
“Our stock has not been trading at a high-enough level to really have it be a real currency to go out and do something ourselves,”
Chief Financial Officer Joe Euteneuer said in an interview yesterday in New York. “That would be our biggest stumbling block. It’s not from a lack of willingness or desire, but really a lack of currency.”
The stock price is one element hindering an acquisition of Level
3 Communications Inc., a speculated target, said Chris Larsen, a Piper Jaffray Cos. analyst in New York. Qwest’s competitors have pursued more takeovers as companies add scale to make up for phone-line losses. Level 3’s business would help Qwest grow while cutting plants and employees, Larsen said.
Euteneuer said phone companies in the U.S. are ripe for more combinations. Windstream Corp., another home-phone company focused on less populated regions, agreed to buy Iowa Telecommunications Services Inc. last month and completed its purchase of Lexcom Inc. this week, building its base of phone and Internet lines. Embarq Corp. and CenturyTel Inc. merged earlier this year.
“Consolidation is something that, in my opinion, I think is going to happen,” Euteneuer said. “Enough people have talked about it, enough people want it to happen and can see the benefits of it.”
Acquisition Target
Qwest lost 48 percent of its value last year. Revenue declined as home-phone customers canceled service, opting for mobile or Internet-based products. Qwest’s shares had rebounded 8 percent this year before today as the Denver-based company cut jobs and worked to retain subscribers with wireless, television and Internet packages.
Level 3’s debt load is also a deterrent to potential acquirers, said Euteneuer, 54. He declined to comment on whether the two companies are in discussions about a deal. Level 3 spokesman Skip Thurman didn’t immediately return a call seeking comment.
Qwest rose 1 cent to $3.94 at 11:14 a.m. in New York Stock Exchange composite trading. Level 3, based in Broomfield, Colorado, advanced 1 cent to $1.37 on the Nasdaq Stock Market.
The stock price, which gives Qwest a market value of about $6.8 billion, may make it an attractive target to other companies, Larsen said. The company formed by the combination of CenturyTel and Embarq, which has branded itself CenturyLink, is the most likely acquirer, and that would be a “merger of equals,” he said.
CenturyLink spokeswoman Debra Peterson declined to comment.
Qwest failed to find a buyer for its long-distance unit earlier this year.
Phone Combinations
Phone companies have combined as the market for home-phone lines shrinks. Declines in new home construction during the recession and customers moving to wireless-only or bundled phone service with cable companies have contributed to customer losses industrywide.
Those are partly to blame for 11 straight quarters of falling sales at Qwest. Euteneuer said he’s working to slow the pace of revenue declines next year, though a return to growth may be further in the future.